What Makes a Real Estate Contract Legally Binding?

by Trinise L. Castro

It is best to write all agreements into a contract.

Real estate contract laws tend to vary somewhat from state to state. It makes sense to check out the real estate laws in the area in which you do business. A real estate contract can be between a buyer and seller, an agent and broker or an investor and seller, or it can involve any number of parties. Generally, two elements must be present in order for a real estate contract to be legally binding. A legally binding real estate contract must be signed by all parties involved and something of value must be exchanged. A handshake alone is not sufficient to legally seal an agreement. In addition to signatures, a contract must be sealed with a tangible commodity—such as cash, goods or services.

Legal Real Estate Contracts

It does not matter what kind of paper the agreement is written on. It can even be written on a napkin—although a napkin is not conducive to writing the meticulous details of an agreement and the napkin can be easily destroyed. However, the agreement must be written, signed and sealed in order to be legally enforceable.

Offer and Acceptance

When a real estate contract is legally binding, all parties have accepted the terms of the contract. First one party makes an offer. The real estate contract becomes legally binding only after the remaining party or parties accepts the first party’s offer. If the second party does not agree to all the terms, the contract is not legally valid. The second party has the option to counteroffer (make a different offer to the first party or request a change to the contract terms). However, if the first party does not agree to the counteroffer, the real estate contract is still not legally binding. Both (or all) parties must reach an agreement regarding all the terms to make the real estate contract legit.

Everyday Language

The terms and agreements should be written in a way that is easy to understand. Use common everyday language when writing the terms of the real estate contract. Avoid using technical jargon or terms that could easily be misconstrued. Fully spell out words instead of using abbreviations. Some abbreviations take on an entirely different meaning when they are not used with clarity. For example, the words “VA loan” can mean either “Virginia loan” (a loan product for residents in the state of Virginia) or the “VA loan” guaranteed by the U.S. Department of Veterans Affairs, which is a totally different thing. To clarify the terms you may want to spell out the words “for sale by owner” in lieu of the abbreviation “FSBO” in a real estate contract.

Contract Expiration

It would be wise to print the date on which the real estate contract is signed by each party and to include an expiration date as well. Real estate contracts are extremely time-sensitive. It is very common to see the phrase “time is of the essence” in a real estate contract. “Time is of the essence” means that the parties must execute the terms of the agreement according to the dates and times set down in the real estate contract. Failure of the parties to submit to deadlines can put either in breach of contract (the breaking of a legal contract or agreement by violation of the terms stated within).

Contract Default

To avoid lengthy court proceedings in the event of default, many real estate contracts spell out the ramifications of default. A common consequence for a buyer in default is the forfeiture of an earnest money deposit to the seller. A seller may be found to be in default for failing to sell a property to a buyer as promised. The buyer can sue the seller for breach of performance on the real estate contract. A renter in default of a real estate rental agreement may forfeit any or all of his security deposit.

About the Author

Trinise L. Castro has been writing on a variety of topics since 1995. Her work has appeared in "Healthy Families Rappahannock Area," where her health-related articles are published, and online at Gadling.com where she is a published travel writer. An expert real-estate writer, she has also contributed to AchieveRealEstateSolutions.com and SFGate.com. Castro is also a spokeswoman and entrepreneur.

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